Month: December 2015

Value & Risk in Fine Wine, Post 3: The Channel Spread

Recap: Last time we started with a broad selection of Bordeaux fine wines across five investment categories. We then used a simple algorithm to re-cluster the wines based on price characteristics. From each of these new clusters we selected a wine to play with. We are looking at  Margaux, Clerc-Milon, La Conseillante and Lafite Rothschild.       Sometimes simple tools are best. At least to start with. Given the Liv-ex data we have, here’s an obvious thing we can do: let’s compare ex-Château release prices with London release prices. The intuition is that a large positive gap between London and Château release prices signals oversubscribed interest for a young wine. This might be explained with reference to the “animal spirits” of an investment bubble. Alternatively, the gap might be explained by market fundamentals: a new wine may be considered fundamentally superior to recent vintages. We call the gap between the London and Château release prices the Channel Spread. The following graph shows a history of the Channel Spread for our four selected wines. Looking at the …

Value & Risk in Fine Wine, Post 2: Preparing the Ground

To develop fine wine market tools we have to decide what wine data to look at. The decisions we make on data will trickle down and affect our tool development. We begin by manually defining four groups of fine Bordeaux wines based on qualitative factors important to wine investors. Our reason for coming up with an initial clustering is to ensure that we include a good range of investment wines in our analysis. The table below shows: the wines we pre-selected, the manually assigned group number, the first available time stamp for the first available vintage on Liv-ex, the  years for which ex-Château prices are missing and then finally the decision of whether to include the pre-selected wine in this analysis. All price data is courtesy of Liv-ex. To track the development of wine prices over time, we are interested in release prices and monthly market price data for vintages going back as far as possible. Most of the supplied data had a first time stamp of 31/07/1983, but only a few wines (e.g. Lafite Rothschild, Mouton Rothschild, Margaux, Léoville-Las …

Value & Risk in Fine Wine – Introduction

Image Link As 2015 fades into memory, WineQuant presents some thoughts on value and risk in the fine wine market, which may prove useful in 2016.  Value & Risk in Fine Wine, Post 1: The call for new tools In the fixed income, equity and commodity markets, practitioners use a range of standard visualization tools to think about financial quantities. In fixed income markets, the shape of yield curves indicates the time value of money. In equity markets, implied volatility surfaces provide snapshots of future price expectations and in commodity markets, forward curves indicate the relationship between cost of carry and current / future demand for an asset. Patterns of thinking develop around the standard tools used. Discussions about relative value, risk and uncertainty inevitably reference the common tool-set of the professional market participant. An advantage of a commonly held tool-set is that the salient characteristics of complex financial dynamics can be understood and communicated at a high level. A disadvantage of a common tool-set is that (unsophisticated) participants may rely on the received wisdom without a …